Cross-National Trends in Earnings Instability and Earnings Inequality

Changes in inequality of yearly earnings can arise from changes in the distribution of lifetime earnings (permanent changes) and changes in the stability of earnings (transitory changes). Past research has found increases in both components in the United States over the past several decades. We extend this literature by comparing the United States with Germany and Great Britain. We use data from the Cross-National Equivalent Files (Cornell University) to document trends in cross-sectional and long-run earnings inequality. These data enable us to examine earnings dynamics during the years 1979-1996 for the United States, 1983-1997 for Germany, and 1990-1997 for Great Britain. Despite differences in labor market structure, our descriptive models reveal similar basic patterns of earnings mobility and dynamics in these countries. We then apply a method of moments approach to estimate the parameters of a heterogeneous growth model of permanent and transitory earnings. The results indicate that although there are substantial differences in overall cross-sectional inequality across these countries, the persistent component of earnings inequality was quite similar in each in the 1990s